Prestige Data Services is a subsidiary of Prestige Telephone Company, designed to perform data processing for the telephone company and selling computer services to other organizations. The subsidiary started operations in 1995 and has yet to experience a profitable month. Worse, its income was low enough to necessitate a report to shareholders by the end of 1996. Although Rowe was discouraged by results to date, he was reluctant to suggest to Bradley that Prestige Data Services be closed down or sold.
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Additionally, Rowe was unsure that the accounting reports really revealed the contribution the Data Services was making to Prestige Telephone and also the accounting for separate activities may obscure the costs and benefits they provided. Using the exhibits provided (Exhibit 1 and 2), analysis was made to determine whether Prestige Data Services should be shutdown, or to be allowed more time to demonstrate its profitability. 3. 0 4. 0 QUESTIONS 5. 0 Question 1: Appraise the results of operations of Prestige Data Services. Is the subsidiary really a problem to Prestige Telephone Company?
Consider carefully the differences between reported ciosts and costs relevant for decisions that Daniel Rowe is considering. 6. 0 1)The first thing we noticed is that fixed and variable costs are included in the report. However, variable costs are the only costs that should be considered when makingdecisions. It is also important to look at the opportunity cost of the leases for thecomputer equipment, which had four years left and are noncancelable. The purpose of thecompany was to provide a step towards deregulation and would decrease the need for arate increase.
Also if they shut down Data Services they would have to pay an outsidecompany to provide this service to Prestige Telephone Company along with lose therevenue from the commercial sales. In regards to the space that Prestige Data uses, theycould potentially rent the out the space to an outside company. There would also be a benefit to laying the personnel off and not having to pay those wages and salaries. However, we came to the conclusion that Prestige Data Servicesis more of a benefit thanRowe initially thought and should be given more time to show its contribution. 7.
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Assuming the company demand for service will average 205 hours per month, what level of commercial sales of computer use would be necessary to break even each month. 8. 0Solution: 9. 0 In order to determine the level of commercial sales of computer use necessary to break even, fixed and variable costs must first be determined. In this case, the variable costs include power, part of operations wage, and materials: 10. 0 Calculating the Variable Cost Behavior Pattern via the High-low Method: 11. 0 Variable Rate = 12. 0 High cost – Low cost 13. 0 14. 0 High activity – Low activity
We will assume that $15,000 reimbursement for corporate services provided by Prestige to its subsidiary can be reasonable estimate of the long run consumption of administration resources by Prestige Data Service. 23. 0 24. 0 The total relevant monthly fixed costs for the subsidiary are: 25. 0 Space costs + Computer leases + Maintenance + Depreciation + Fixed portion of the power + Fixed portion of the operations wages + Systems Dev. & Maintenance salaries + Administration salaries + Sales salaries + Sales promotion expenses + Corporate services 26. 0 $(9,240 + 95,000 + 5,400 + 26,180 + 109.
Thus, the income will be higher if the 138 operations hours are retained. 168. 0 169. 0 Question 4: Can you suggest changes in the accounting and reporting system now used for operations of Prestige Data Services which would result in more useful information for Rowe and Bradley? 170. 0 171. 0 172. 0 REFERENCES: 173. 0 Haider, I. (2004). Prestige Telephone Company – AIM4343 [Online], Available from: http://www. academia. edu/4007644/Prestige-4343-additional_notes_2_ [Accessed on 21 March 2014] 174. 0 Putra Business School. (2013). Accounting for Decision Making. McGraw-Hill Education, Singapore, p. 427. 175. 0